Why the 40-year bull market isn’t over yet

There are cycles in the market that repeat themselves periodically. The real economy is not doing well right now after the coronavirus outbreak. But the stock market can be a different story. Regarding stock market cycles, has an interesting column that I’ve translated for you. The full text can be seen below.

Is this a bear market?

Recently, there has been a lot of discussion about the current market cycle. Is this a bear market? That might be the case. But what if this is just a short-term correction in the middle of a long-term bull market cycle that has lasted 40 years? This was also a question that Jacques Cesar raised earlier. He says.

“The long-term bull market began in late March 2020 following the market plunge triggered by the initial outbreak of COVID-19. Previous long-term bull markets began in 1982 as stocks shook off a 14-year bear market that saw the S&P 500 Index drop by more than half when adjusted for inflation. Within the long-term bull market cycle, there have also been notable short-term bear markets, including the 1987 crash, the Internet crash, and the global financial crisis.”

Before dismissing the concept outright, there is some credence to his claim.

For example, as you can see in the figure, valuations are still high by historical standards. In a bear market cycle, valuation should be about retracing return expectations and moving forward.

Rolling 10-year yield vs. valuation

We’ve also seen a decoupling of stock markets from underlying profitability since 1980. The lack of mean reversion in returns is a concern.

“The rate of return is probably the most semi-regressive sequence in finance, and if it’s not semi-regressive, there’s something seriously wrong with capitalism. If high profits don’t drive competition, there’s something wrong with the system, and it’s not working.” – Jeremy Grantham

Cumulative change in real corporate profits versus the SP500 index.

This is mainly due to the following reasons Financial markets woke up to a series of monetary stimulus measures on a global scale. Despite the market decline in 2022, investors are still focused on the actions of the U.S. Federal Reserve, or Fed. The Fed removes the risk of market cycle completion every time.

The Fed understands the economic disruption that would result from losing control of the financial narrative. That’s why Fed Chair Jerome Powell recently said he would act if necessary.

“If the tightening is excessive, it can support economic activity again.”

We will focus on the following psychological cycles related to the current secular market cycle that have remained historically consistent: (Chart courtesy of Jean Paul Rodrigue.)

A chart showing the different stages of the psychological cycle in relation to the market cycle.

The importance of a full market cycle

Some of the best long-term investment success stories are when people like the people below set in motion events like these.

  • Warren Buffett started in 1942 and bought Berkshire Hathaway in 1964.
  • In 1980, Paul Tudor Jones launched a hedge fund.
  • Peter Lynch has managed the Fidelity Magellan Fund since 1977.
  • In 1975, Jack Vogtle launched Vanguard.

The list goes on and on, but you get the idea. Much of the success of these investment masters came from capturing the beginning of an upward cycle with low valuations and high forward yields.

SP500 actual price vs. valuation.

“Here’s an important point. The vast majority of investment gains have come in just four of the eight major market cycles since 1871; in all other periods, returns have actually lost money to inflation over that time.”

Looking at each full cycle period as two parts, a bull market and a bear market, redraws the entire cycle. In other words, what if we only looked at 4 cycles instead of 8?

Secular full market cycles since 1900

If we take a long view of the market, we can see that the bull market that began in 1980 is far from over.

In the chart above, you can see that the CAPE (cyclically adjusted price-to-earnings ratio) has reverted to much lower than its long-term value in the past two market cycles. While valuations briefly dipped below their long-term trend in 2008-2009, they have not returned to levels low or long enough to form the fundamental and psychological underpinnings seen at the beginning of the last two full market cycles.

Combining psychological and market cycles

Reframing your analysis by combining sentiment cycles with full market cycles can help you see where you are differently. Combining psychological cycles compresses the four major secular market cycles into just three overall market cycles.

The first full market cycle lasted 63 years, from 1871 to 1934. This period ended in 1929 with the crash and the beginning of the Great Depression.

Display the chart

The second full market cycle lasted 45 years, from 1935 to 1980. While this cycle did not have the same impact on the economy as the Nifty-Fifty stock crash and the 1974 and 1929 crashes, it did significantly dampen the investor sentiment of market participants.

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The third (current) full market cycle is only 42 years old. Still, the

Given the increase in value,

it is likely that the current market cycle is not over yet.

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The following chart shows that the bull market started in 1980.

  1. The long-term bullish trendline is holding.
  2. The cycle oscillator is only half the story. 
  3. Based on Fibonacci retracement, the 61.8% retracement is nearly intersecting the long-term bullish trendline near 1500, suggesting that a full retracement could be dire.
SP500 Bull Market Cycle 1980 To Present

Again, I’m not suggesting that this is true – this is a combination of a fragile economy, high debt levels, valuations, and “irrational exuberance.”

Understanding risk

This thought experiment aims to recognize that an imbalance exists now that has never occurred historically.

Vitaly Kassenelson wrote

“Our goal is to win the war, and to do that, we may have to lose a few battles along the way. Yes, we want to make money, but it’s much more important that we don’t lose money.”

I agree with this, which is why I keep my investments but hedge them within my portfolio.

Unfortunately, most investors don’t understand market dynamics and how prices move. Financial markets are also
are ultimately bound by the laws of physics.
In the short term, prices can appear to defy the laws of gravity, only to be reversed in extreme circumstances. This has repeatedly resulted in catastrophic losses for investors who ignored the risk factors.

Of course, this time might be different. But as Ben Graham said in 1959:

“”’The more things change, the more they stay the same.” I’ve always thought this saying applies to the stock market more than any other sector. Now, the really important part of this adage is the phrase “the more things change, the merrier”.

The economic world has changed dramatically and will change even more in the future. Most people now believe that the fundamental nature of the stock market is undergoing a corresponding change. But if my cliché is correct, the stock market will continue to be essentially the same as it has been in the past, where big bull markets are inevitably followed by big bear markets.

In other words, where today’s free lunch pays double tomorrow. Based on recent experience, I think the current stock market levels are very dangerous.”

Remember, it’s easy to make money in the first half of a full market cycle. Maintaining revenue in the second half is the hard part.

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